If you leave
playing music on your browser long enough, a prompt comes up asking “Are you still listening?” For each song, Pandora has to pay a royalty fee of $0.0011. An idle listener playing an average of 20 hours a month at a rate of 14 songs/hr. costs Pandora about 30 cents.
The Internet Radio Fairness Act recently reached congress with the aim of decreasing these costs. Internet radio has raised concerns that the current content fee structure is unfair, hence the name of the bill. The big claim is that Pandora currently pays 50% of its revenue as royalties. CEO Joe Kennedy of Pandora and other executives at the company have quoted the statistical comparisons. They are publicizing the fact that satellite radio providers, mainly
Sirius XM Radio (SIRI)
, pay 7.5-8% of their revenue in royalties. Even cable radio pays only 15% for content.
The comparison, however, isn’t apples to apples. Radio listeners access the same content through satellite, cable, and internet radio. But these businesses are completely different and valuing them gets intricate. You might has well compare Pandora to Netflix or Comcast.
Monetizing Through Advertising
The majority of Pandora’s revenue stream is advertising, almost $160 mil in the first 6 months this year. Subscription revenue was a fraction of that at $22 mil. Pandora, mostly free, depends on listening hours (“inventory”) to sell ad space. These listening hours are directly tied to the variable cost in question, a flat fee per song played. In contract, Sirius derived 87.1% of its revenue from subscribers directly; its services include non-music programming with no commercials.
Pandora, like other digital companies, reworks traditional advertising. The Pandora platform creates the opportunity to target very specific demographics and tastes. A humorous example: A recording of the jazz song “Deep Purple” accompanies a scrolling advert for Nexium.